Discover 2010 Annual Report Download - page 26

by regulation or order. Certain servicing activities are also permissible for a bank holding company if conducted for or on
behalf of the bank holding company or any of its affiliates. Impermissible activities for bank holding companies include
activities that are related to commerce such as retail sales of nonfinancial products.
A financial holding company and the non-bank companies under its control are permitted to engage in activities
considered financial in nature; incidental to financial activities; or complementary to financial activities if the Federal
Reserve determines that they pose no risk to the safety or soundness of depository institutions or the financial system in
general.
Being a financial holding company under the GLBA requires that the depository institutions that we control meet certain
criteria, including capital, management and Community Reinvestment Act requirements. In addition, under the Dodd-
Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”), we will be required to meet certain capital
and management criteria to maintain our status as a financial holding company. If we or our depository institutions were
to fail to continue to meet the criteria for financial holding company status, we could, depending on which requirements
we failed to meet, face restrictions on new financial activities or acquisitions and/or be required to discontinue existing
activities that are not generally permissible for bank holding companies.
Federal Reserve regulations and the Federal Deposit Insurance Act, as amended by the Reform Act, require that bank
holding companies serve as a source of strength to each subsidiary bank and commit resources to support each
subsidiary bank. This support may be required at times when a bank holding company may not be able to provide such
support without adversely affecting its ability to meet other obligations.
The Reform Act, which was enacted in July 2010, addresses risks to the economy and the payments system, especially
those posed by large systemically significant financial firms (including bank holding companies with assets of at least $50
billion, which would include us). The Reform Act could have a significant impact on us by, for example, requiring us to
change our business practices, requiring us to establish more stringent capital, liquidity and leverage ratio requirements,
limiting our ability to pursue business opportunities, imposing additional costs on us, or otherwise adversely affecting our
businesses. For more information regarding the Reform Act, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Legislative and Regulatory Developments” and “Risk Factors.”
Banking Subsidiaries
We operate two banking subsidiaries, each of which is in the United States. Discover Bank offers credit card loans,
student loans and personal loans, as well as certificates of deposit, savings accounts and other type of deposit accounts.
Discover Bank is chartered and regulated by the Office of the Delaware State Bank Commissioner (the “Delaware
Commissioner”), and also regulated by the Federal Deposit Insurance Corporation (“FDIC”), which insures its deposits
and serves as the bank’s federal banking regulator. Our other bank, Bank of New Castle, is chartered and regulated by
the Delaware Commissioner, and also regulated by the FDIC, which insures its deposits.
Dividends
There are various federal and state law limitations on the extent to which Discover Bank can finance or otherwise
supply funds to us through dividends, loans or otherwise. These limitations include minimum regulatory capital
requirements, federal and state banking law requirements concerning the payment of dividends out of net profits or
surplus, and general federal and state regulatory oversight to prevent unsafe or unsound practices. In general, federal
and applicable state banking laws prohibit, without first obtaining regulatory approval, insured depository institutions,
such as Discover Bank, from making dividend distributions if such distributions are not paid out of available earnings or
would cause the institution to fail to meet applicable capital adequacy standards.
Additionally, regulatory guidance requires that we inform and consult with the Federal Reserve before increasing our
quarterly dividend or declaring and paying a dividend that could raise safety and soundness concerns; for example,
declaring and paying a dividend that exceeds earnings for the period for which the dividend is paid.
Capital
We, Discover Bank and Bank of New Castle are subject to capital adequacy guidelines adopted by federal banking
regulators. For a further discussion of the capital adequacy guidelines, see “Management’s Discussion and Analysis of
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